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Few people like to budget. While some find freedom in a budget, most find them too restrictive.
Or too much work.
The 50/30/20 budget rule provides a way to budget without much of the work that people hate or struggle to keep up with when budgeting.
The 50/30/20 budget divides your earnings into three separate categories or buckets to cover essential costs and ensure that all aspects of your life are financially tended to. Basically, it is a simple way of helping you to budget effectively that doesn’t involve a detailed breakdown of all your finances. The way it works is that you spend 50% of your after-tax take-home pay on needs, 30% on wants, and then the remaining 20% is spent on savings and debt management.
This way, you can check all the boxes and cover all of the financial components in your life regularly. Too many of us get caught up with one or two of these buckets without actually covering all three of them as often as we should. By using the 50/30/20 budget, you can focus on all of these areas without dealing with the burnout of spreadsheets, budget calculations, and endless piles of receipts.
How does the 50/30/20 budget work?
The way this budget works is that “50” accounts for 50% of your take-home earnings after-tax. This money goes on the essential living costs like rent/mortgage, food, utilities, transportation, and other essentials for day-to-day living. The largest part of your budget is dedicated to the most important costs and expenses in your life. The “50” also includes any minimum monthly debt repayments you need to make to avoid defaulting and falling behind.
The “30” bucket refers to 30% of your earnings going toward lifestyle costs and expenses. This category includes expenses like vacation costs, shopping, cell phone bills, cable and internet costs, eating out, and pets. Basically, these are non-essential budget categories that we love and want to include in our lives.
Finally, the 20% bucket is for long-term financial goals. This could be paying off existing debt, building up retirement savings, or other wealth-building opportunities. If you have money goals, this is typically the bucket you would use to fund them.
Related Reading: Best Family Budget For Every Personality Type
How to create a 50/30/20 budget
To create a successful 50/30/20 budget, you need to have a plan. Below are a few things to consider when building a 50/30/20 budget.
Assess Your Finances
Take a deep dive into your finances so you understand the full picture of your current financial situation. Look at your income, current debts, bills, expenses, and spending habits. Budgeting apps are an easy way to automate the tracking process. Once you have a handle on what’s coming in and going out, you’ll have a better understanding of what you need to do and how to prioritize your money goals.
Consider Unexpected Costs
There are bound to be unexpected costs that pop up from time to time. Have a plan for addressing them. They could fit into one of the three budget categories, but another option is to build a solid emergency fund to handle unexpected costs.
You never know when you’ll need cash on hand if your car breaks down or you require unexpected household repairs.
Pay Attention to Your Post-Tax Income
Since the 50/30/20 budget (or any budget for that matter) utilizes your post-tax income, figure out how much you bring in each month. Then, start to divide it into the three categories. There’s no need to physically separate the money if you don’t want, but having separate bank accounts, especially for savings, might be beneficial. It will ensure that funds don’t get used by the wrong bucket accidentally.
Stick to It
Switching to a new budget may take time to get used to. Give it a few months, especially if you’ve never budgeted before, to make sure it’s addressing your needs. Budgets only work if you put in the work needed to start and keep them going. Even a simple budgeting system like the 50/30/20 rule requires some hard work and a little patience.
Who is it for?
The 50/30/20 budget is a good option for individuals and families new to budgeting. Reducing your budget to percentages takes the guesswork out. It’s an easy budgeting system to create and manage in most cases.
Who should pass on this budget?
If you like more control of your budget, the 50/30/20 budget is not for you. It’s also not the best plan for those who like to get lost in the minute details of the finances or have specific money goals that don’t align with the percentage breakdowns. Yes, you could adjust the percentages to fit your needs, but oftentimes, a budget should be a living organism that adapts and changes as your specific needs change.
Of course, if you don’t like budgets, using the 50/30/20 rule doesn’t make much sense. Another budgeting method, referred to as the Anti Budget, might be a better fit for your needs (and your sanity).
Our Take on The 50/30/20 Budgeting Rule
I’m not a huge fan of the 50/30/20 budget. I find it to be too restrictive. Also, I don’t think it puts enough emphasis on your money goals. If you want to put more towards savings or retirement, you can’t with the 50/30/20 budget. Giving, which is a big part of our budget, isn’t accounted for in the 50/30/20 budget either.
The other downside is that it’s the same budget regardless of your financial situation. Regardless of whether you’re drowning in student loan debt or you’re on your way to financial independence, it’s the same budget. Personal finance is personal and your budget should take that fact into account.
Tips for success using the 50/30/20 budget
Thinking about using the 50/30/20 budget? Here are some tips that can help you as you implement this new strategy.
Pay Attention to Your Percentages
Take your budget seriously. If you’re going to use a percentage-based budgeting system, stick to the percentages. It’s tempting to move money around as needed, but if this starts to happen a lot, then you might want to consider another budgeting method.
Be Prepared to Adjust
With that said, there are times when you might need to adjust your budget, especially if an emergency expense pops up. Hopefully, you have an emergency fund in place, but there are times when you might need to go outside of that fund too.
Reducing your expenses is one of the best ways to keep an effective budget. Spend money on things you love and value and aggressively cut spending in less important areas. Reducing expenses will free up money in your budget to tackle other money goals.
What’s your favorite budgeting method? Let us know in the comments below.
Kevin Payne is the co-founder and budgeting and family travel enthusiast behind FamilyMoneyAdventure.com.
Kevin is a freelance writer specializing in personal finance and travel. He is a regular contributor to Forbes Advisor, MoneyGeek, CreditCards.com, Credit Karma, Money Under 30, and Student Loan Planner.